Pakistan’s economy has experienced relatively high growth of above 4.5 percent during FY2014-18. Meanwhile external liabilities and domestic debt have increased by almost 50 percent over the same period. This substantial increase in the external and domestic debt is a major issue for policymakers concerned about debt sustainability in Pakistan. With the objective of analyzing debt sustainability in Pakistan, this study applies a probabilistic approach to project the debt path from FY2019 to FY2025. In this approach, projections of the primary balance are derived from the estimated fiscal reaction function while the density forecast of external debt is derived from various statistical and structural models. The forecasts of the primary balance and the external debt along with the shocks of real GDP growth, real exchange rate and real interest are incorporated in the debt accumulation identity. This procedure provides a fan chart of the total debt-to-GDP ratio, which represents the appropriate uncertainty associated with the projections. The key finding of the paper is that external debt is reasonably sustained; however, the situation of the total debt is alarming. External debt may witness a declining trajectory in FY2019-20 and then remain stable within the range of 20-30 percent of GDP. However, the total debt-to-GDP ratio is rising throughout the projection period, which starts from around 100 to 175 percent of GDP in FY2020 and FY2025 and is higher than any sustainable threshold level. Therefore, policy makers need to contain fiscal deficits by domestic resource mobilization and the adoption of austerity in spending on a priority basis.
KEYWORDS: Pakistan, public debt, external liabilities, debt sustainability, probabilistic approach.
JEL: F34, F47, H63, H68.

Industrial clusters and special economic zones are key areas of focus for industrial policy makers who are aiming to expand the industrial base and increase competitiveness. Thus, the role of development of industrial clusters in the productivity improvement of manufacturing firms merits attention. We use the firmlevel Census of Manufacturing Industries (CMI) and Directory of Industries (DOI) datasets to empirically investigate the relationship between agglomeration and firm level total factor productivity for different sectors in Punjab, Pakistan. Our findings suggest that there is a correlation between localization, urbanization and total factor productivity of firms in the Punjab. However, the relationship varies by sectors, necessarily pointing industrial policy towards sector-specific recommendations.
KEYWORDS: Pakistan, Total factor productivity, industrial concentration, economic geography.
JEL: E24, L19.

This paper tests Uncovered Interest Rate Parity (UIP) using LIBOR rates for six major international currencies for the period January 2001 to December 2008. We find that UIP generally holds over a short-term (above 5-months) horizon for individual as well as groups of currencies. Our results suggest that it is important to consider the cross-correlation between currencies. We also find that “state dependence” plays an important role for currencies with a negative interest rate differential vis-à-vis the US dollar. This state dependence could also be instrumental in explaining exchange rate overshooting.
KEYWORDS: UIP, LIBOR, system SUR, system DGLS, system DOLS.
JEL: G12, F31, G15.

In this article, we investigate the distinguishing features of fast growing firms in the Pakistani textile and apparel sectors. We find that the distribution of firm growth- both in terms of employment and sales - is very heavily skewed toward the right-tail, confirming earlier findings that firm growth is generated by a very small number of firms. We found that small and young companies grow faster and generate higher employment. We also used various indicators of a firm’s innovation behavior and found that more innovative firms grow faster. Our results suggest that it is not the possession of individual attributes, but rather a combination of particular firm attributes that defines fast growing firms. Specifically, we found that the blend of being small, young and innovative explains the fast growth in firms. on overall these companies also create more jobs.
KEYWORDS: Firm growth, employment creation, young innovative companies, textiles, Pakistan.
JEL: O12, L26.

This study empirically investigates the effect of surplus education on the earnings distribution in Pakistan using quantile regression. The method of realized matches is used to measure the required level of education in each occupation from the Pakistan Social and Living Standards Measurement (PSLM) 2013-14 survey data. There is heterogeneity in returns to surplus education among overeducated workers. These returns are higher for workers at the upper half as compared to the lower half of the earnings distribution. Surplus education earns positive returns but less than the returns associated with the level of education required for jobs. Further, the difference in returns among the overeducated is higher than the difference in returns among workers who have the required education for the job. The findings imply that the surplus education factor is significant in explaining how education contributes in earnings differentials and inequality.
KEYWORDS: Surplus education, earning inequality, labor markets, Pakistan.
JEL: I24, J31.

In the context of a high prevalence of both poverty among households and business failures among firms in the majority of Sub-Saharan African (SSA) countries, competition is seen as one of the viable tools for transforming and improving these economies. This can be achieved by boosting productivity, improving output markets, increasing innovation and promoting economic growth. This study examines the sources of market power among firms within a variety of institutional settings using a large sample of data from 23 SSA countries. Tobit panel models comprising both fixed and random effects are used to estimate the determinants of market power. The study reveals that a large number of firms control less than 5 percent of the market with a few firms controlling between 5 and 34 percent of the market. At the same time, there are a small number of firms controlling between 30 and 100 percent of the markets in Sub-Saharan Africa. The findings further show that economic and political institutions significantly matter in the determination of power among firms in SSA. However, the influence of institutions varies significantly depending on the type of institutions and regional differences.
KEYWORDS: Competition, institutions, firm, market power.
JEL: D41, K20, L22, L41, O55.

To counter the severe trade deficit problem that Pakistan faces, we explain how to move up the value chain of exports by reducing tariff rates on the intermediate inputs used by local manufacturers. The availability of cheaper intermediate inputs through tariff reductions can substantially reduce input constraints. We begin by identifying trends in the tariff rates imposed on intermediate inputs, and their imports over time by Pakistan and its counterparts. Using an instrumental variable approach, we measure the gains that can be achieved by importing more of these intermediate inputs in terms of export performance indicators. We emphasize that input tariff reductions could help Pakistan expand exports. We also identify specific sectors in which intermediate input tariff reductions could have significant gains for Pakistan in terms of export growth. We recommend the need to reduce intermediate input tariffs in these sectors only, rather than general tariff reductions across all sectors.
KEYWORDS: tariffs, Pakistan.
JEL: F13.

This article illustrates the dynamics of and tradeoff between inflation and output in Pakistan by utilizing data on 18 major trading partners in a cointegration analysis. In doing so, we use key features of the global vector autoregressive approach to construct a model that captures foreign-specific variables related to Pakistan; these are analyzed empirically along with domestic data for the period 1972–2014. Our findings show that, after accounting for the impact of increasing interdependencies, trade spillovers and changing global macroeconomic conditions, a long-run equilibrium relationship exists between domestic inflation and output. The foreign variables have a significant impact on the key domestic variables. In particular, domestic inflation and trade openness, foreign inflation and world oil prices have significant explanatory power for Pakistani output. Policymakers in Pakistan should therefore account for global developments, specifically in trading partner economies
KEYWORDS: Pakistan, cointegration, cross-country spillovers, inflation-output dynamics, oil prices.
JEL: E31, E52, O47.

This study empirically investigates the aid effectiveness debate in light of the Burnside-Dollar (2000) hypothesis that the recipient country’s policy environment is critical for aid effectiveness. Based on data from ten Asian countries for 1984–2015 and in line with Burnside and Dollar (2000), we construct a new composite policy index. Employing two-stage least squares to estimate the model, we find that aid had a negative impact on economic growth during the study period for these countries, thus refuting the Burnside-Dollar aid effectiveness hypothesis.
KEYWORDS: foreign aid, macroeconomic policy, economic growth, Burnside-Dollar hypothesis, Asia.
JEL: 040, P45.

The evolution of money has accompanied the development of civilizations and technological innovations, leading to today’s cryptocurrencies. Cryptocurrencies have become a popular mode of payment globally because of their low cost, high-speed transferability and a decentralized tracking network that provides secure transactions and a high degree of anonymity. However, the decentralized system of cryptocurrencies has made global monetary systems more dynamic and therefore more prone to misuse as well as posing a threat to financial stability. Cryptocurrencies are also gaining popularity in Pakistan: its first cryptocurrency, named ‘Pakcoin’, was launched in 2015. The State Bank of Pakistan does not recognize any digital currency, and the Federal Board of Revenue and Federal Investigation Agency have taken legal action against local and internationally traded cryptocurrencies. This article reviews these risks and provides various regulatory solutions so that methods can be developed to improve the management of financial innovations and create a safer environment in which financial innovation can continue. Furthermore, developing countries such as Pakistan can take advantage of distributed ledger technology (used in cryptocurrencies) in applications including: microfinance to help the unbanked, in data identification systems and in land registries to help enforce property rights.
KEYWORDS: cryptocurrency, blockchain, regulation, Pakistan.
JEL: G19.